As an active investor, I want to beat the performance of the FTSE 100. Why? Well, the FTSE 100 index is the general benchmark used when trying to measure the performance of the stock market in the UK. There are other measures that I could use to compare my performance against. I could try and beat the rate of inflation, the rate of interest on a Cash ISA, or other comparatives. Yet I think the FTSE 100 is the best and most relevant metric to use. Here are a few ways I’m trying to beat it this year.
The first method I’m using is trying to invest regular amounts throughout the year. This way, I can be selective and try to use my funds for that period to buy on any potential dips. For example, in July we saw a drop of almost 300 points over the course of a few days in the FTSE 100. So I could have bought at this lower level for my July allocation.
Obviously, it’s impossible to always buy at the bottom of each dip, but as long as I’m trying to avoid buying at the very top, this should help me to beat the FTSE 100 performance over a longer period. This is because on average, my buying price will be lower than the average FTSE 100 price during the year.
This method assumes that I buy a FTSE 100 tracker each time, to try and replicate the overall index. If I want to be more active with my stock selection, my second method would suit me better.
Buying selective FTSE 100 stocks
The second way I’m considering is to buy a selection of FTSE 100 stocks. The index reflects the price of all the constituents, so if I can remove the shares I think will underperform and invest more in those I think will outperform, I could beat the index.
It’s less about cutting out entire sectors from my portfolio, but rather being selective in the stocks I pick from each sector. For example, within the banking space, I’d prefer to own NatWest over HSBC. I feel the position in the market that NatWest has in the UK, along with its more streamlined business model, should allow it to outperform HSBC.
The risk of this method is that I will be more concentrated in my holdings. I might hold a dozen stocks or so, versus holding the entire index. So if there are a few stocks that see a large share price gain that I’m not holding, I could start to lose ground on the index over the year.
The final method I’m trying is to factor in dividend income. My overall return over the course of the year isn’t just from share price gains or losses, but also from the income I’ve received. The average FTSE 100 dividend yield is currently around 3%. So if I can be selective and own stocks with yields in excess of 3%, this can provide another boost when I tot up my returns at the end of the year.
Regardless of whether it’s via dividend income, buying on dips or being selective in my stock picks, I can try and beat the FTSE 100 over time.
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jonathansmith1 has no position in any share mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.